IPO Under the lens – ICICI Prudential Life Insurance Company Limited

ICICI Prudential Life Insurance Company Limited is the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016. It’s a joint venture between ICICI Bank Limited, India’s largest private sector bank in terms of total assets and Prudential Corporation Holdings Limited, a part of the Prudential Group, an international financial services group. It offers a range of Life insurance, health insurance and pension products and services.

Source: Kotak Securities

Quick facts

1. They were the largest private sector life insurer in India by total premium in fiscal 2016 and assets under management at March 31, 2016.
2. In fiscal 2016, their market share on a retail weighted received premium basis was 11.3% compared to a market share of 9.7% of its nearest competitor among all private and public insurance companies.
3. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches.
4. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies
5. As of March 31, 2016 their solvency ratio was 320% compared to IRDA prescribed level of 150%

Strengths

1. Consistent and robust fund performance

Funds representing 92.9% of their market linked assets performed better than their respective benchmarks since inception.

2. Quality service experience

In fiscal 2016 their grievance ratio was 153 per 10,000 new policies issued compared to private sector average of 345 per 10,000 new policies issued.

In fiscal 2016 their claim settlement ratio for retail death claims was 96.2% compared to private sector average of 89.4%.

3. Their expense ratio of 14.6% for fiscal 2016 was one of the lowest among private sector life insurance companies

4. Diversified multi-channel distribution network

They have a growing bancassurance network. ICICI Bank and Standard chartered             Bank currently exclusively distribute their life insurance products. As of March 31, 2016 they had 1, 21,016 individual agents and as of July 12, 2016 their bank partners had over 4,500 branches. According to CRISIL Research, Life Insurance Industry Report, July 2016, they have one of the largest channels among private sector life insurance companies in India in terms of premium as on 31 March, 2016.

5. Digitisation and transformation of sales, customer onboarding and internal processes:

They have created a device agnostic technology platform that provides their customers, employees and distributors with seamless experience from sales to claim settlement. In fiscal 2016, 92.3% of their new business applications were initiated on their digital platform either by distributors or customers. This has also helped them improve employee productivity. Their retail weighted premium received per employee grew at a CAGR of 29.1% from fiscal 2014 to fiscal 2016. They have an architecture which can integrate their systems with partners quickly which facilitates faster issuance of policies.

6. Robust risk management and control processes

Risk is an integral part of an insurance business. They have risk management and control processes with a detailed cost benefit analysis for risk mitigation and a strong focus on credit quality of their portfolios.

7. Experienced Senior Management Team

Their CEO, Mr. Sandeep Bakhshi has been with their company for over 5 years. He joined ICICI group in 1986 in project financing group of ICICI ltd. He has over 32 years of experience in the banking, financial services and insurance sector. 28 of top 36 members of their management team have been with ICICI group for over 10 years. Senior managerial persons in the actuary, investment, underwriting and claims department have average functional experience of 16 years.

8. It has fairly good persistency ratio compared to peers

Data Source: kotak Institutional Equities

Risk factors

1. Adverse effect on equity market in India could have an impact on their business as it will have an impact on their market linked products.
2. Change in market interest rates could have impact on their investments and business profitability.
3. Their inability to attract or retain distributors, key sales employees could have a material impact on their finances.
4. Any shift in consumer attitude towards financial savings could have an impact on their business.
5. Catastrophic events, including natural disasters could increase their liabilities for claims and have an impact on their finances.
6. Most of their new business premiums come from few products. Any constraints in selling these products due to regulatory changes could impact their business.

Valuations

The embedded value (EV) represents present value of future profits from assets after adjusting for risk. The price to embedded value multiple is approx. 3.4 times FY16 EV. Compared to multiple of HDFC and max life which is 4.2 times FY16 EV, valuations are attractive.

 

Data Source: Mint, 14 September 2016

Our opinion: Subscribe, but only if you are doing so for the long term

Whilst it is the first of its kind IPO in its space and has a large distribution network, strong brand franchise, strong solvency ratio, good settlement ratios, an attractive price to embedded value ratio relative to Max/HDFC and an experienced management, the fair value of the stock in our opinion is lower than the current offer price for the IPO. Thus, you should look to subscribe to this issue only with a long term investment horizon, as the offer price currently does not provide significant upside in the short term in our opinion.

 

 

 

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IPO under the lens – Larsen & Toubro Infotech Ltd.

L&T Infotech is a large global IT services and solutions company, NASSCOM (National Association of Software and Services Companies) ranked them the 6^th largest India IT Services Company in terms of export revenues in 2014.

 

L&T Infotech has come up with an IPO of Rs. 1228 Cr. The details are as under

Data Source: JM Financial

Purpose of the issue

The purpose is to provide liquidity to the existing shareholders.

Quick facts

• They offer IT services in diverse industries such as Banking & Financial services, insurance, energy and processes, consumer packaged goods, retail and pharma, media and entertainment, hi-tech and consumer electronics and automotive and aerospace.
• Their range of services includes application development, maintenance and out sourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform based solutions.
• Larsen & Toubro Ltd. was incorporated in 1996. The L&T group provides them with access to professionals with deep industry knowledge and its corporate and business culture

Besides India, they have global presence

• Their revenues from continuing operations increased from Rs. 34278million in FY 13 to Rs. 49680 million in FY 15.

Strengths

• Their business to IT connect model

They are one of the very few IT service providers who are part of such a diversified business conglomerate. The experience and institutional knowledge of the L&T group helps them to capitalise on strategic opportunities at a faster pace.

• The strong brand support

L&T provides them with a competitive advantage and helps them in attracting talent, clients, capital, benefit of parent’s global network, best corporate governance practices, etc. They can continue to capitalise on the ability to engage with strategic global clients, vendors and partners of the L&T group.

• Established long term client relationships

Their client base includes world’s largest and well known organisations including 41 out of fortune 500 companies. They have a history of high client retention and derive significant amount o revenue from repeat business.

They carry out regular surveys which helps them ensure high level of client satisfaction. They provide customised client solutions flexible to their client needs through their “Thought Partnership program “ which is designed such that they work with business leaders from their clients on business specific needs like reducing run costs, realigning IT with business changes and helping tem envision their future technological needs.

 

• Track record of established process

 

They have expanded their onshore, offshore and near shore presence thus developing their global delivery model. They have a reputation for delivering high quality IT solutions and timely completion of projects. They have a track record of executing a number of large, end to end critical projects in diverse business areas.

Risk Factors

• Their business will suffer if they fail to innovate, anticipate and develop new services and enhance existing services to keep pace with change in technology.
• Due to their global presence their revenues and profitability will be impacted by exchange rate fluctuations.
• They derive a significant portion of their revenue from a limited number of corporate clients and their revenues could decline if they lose a major client.
• They may be liable to client’s loss caused due to system failure, disclosure of confidential information or data security breaches.

Valuations

Extracts from P&L

It has experienced earnings growth in all periods except 2013-14.

Earnings per Share

PE Ratio based on 31 March 2015 EPS

Comparison with peers

PRE based on 31 March 2016 EPS

Data source: JM Financial services, DRHP

Our opinion

You can consider subscribing to this IPO and exiting post listing.It has a reasonable valuation compared to peers at this stage, but it does not have a very differentiated business model.

Data Source: DRHP

Image credit: economydecoded.com

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IPO under the lens – Mahanagar Gas Ltd.

Mahanagar Gas Ltd. is one of the largest city gas distribution companies in India. Established in 1995 they have more than 20 year of experience in supplying natural gas in Mumbai and are presently sole authorised distributor of compressed natural gas (CNG) and Pipeline Natural Gas (PNG) in Mumbai, its adjoining areas and the Raigad district in the state of Maharashtra. They are coming up with an IPO on 21 June 2016. The details are as under:

Company	Mahanagar Gas Limited IPO
Profile	Mahanagar Gas Limited is one of the largest city gas distribution (“CGD”) companies in India. Company has more than 20 years of experience in supplying natural gas in Mumbai and are presently the sole authorised distributor of compressed natural gas (“CNG”) and piped natural gas (“PNG”) in Mumbai, its Adjoining Areas and the Raigad district in the state of Maharashtra, India. Company is  promoted by GAIL and BGAPH, each of who holds 49.75% of the Equity Shares. GAIL is a Maharatna public sector undertaking and the largest natural gas transmission company in India. BGAPH is headquartered in Singapore and is a part of the BG Group, an international exploration and production and LNG company.
Offer Period	Offer Opens :  Tuesday, June 21, 2016 Offer Closes :  Thursday, June 23, 2016
Lead Manager	Kotak / Citi
Price Band	Rs.380/- to Rs.421/- per equity share
Bid Lot	35 Equity share and multiple of 35 equity shares thereafter
Issue Size overall	Offer for sale 2,46,94,500 equity shares (equal sale by GAIL & British Gas {now Shell}) (Rs. 938.39 cr. @ lower price band & Rs.1039.64 cr. @ Upper price band)
Employee Reservation :	Upto 2,00,000 equity shares
Employee Discount:	Rs. 38/- per equity share only for Employee category.
Face Value:	Rs.10 each
Net Offer:	2,44,94,500 equity shares (Rs.930.79 crs @ lower price band & Rs.1031.22 crs @ upper price band)
QIB (including Anchor)	50% of the Offer(12247250 Equity shares) (Rs.465.40 crs @ lower price band & Rs.515.61 crs @ upper price band)
NIB	15% of the Offer(3674175 Equity shares) (Rs.139.62 crs @ lower price band & Rs.154.68 crs @ upper price band)
Retail	35% of the Offer(8573075 Equity shares) (Rs.325.78 crs @ lower price band & Rs.360.93 crs @ upper price band)
Mode of Payment	ASBA Mandatory (No Cheque will be accepted)
Registrar	Link Intime India Pvt. Ltd.

 

Quick facts

• Mahanagar gas is a joint venture between Gas Authority of India ( GAIL) and BG Asia Pacific Holdings Private Ltd (BGAPH) each owning 49.75% of its equity shares. GAIL is a Maharatna Public sector undertaking and the largest natural gas transmission company in India while Singapore based BGAPH is a part of Royal Dutch Shell
• Mahanagar gas distributes CNG for use in motor vehicles and PNG for use in household, commercial and industrial use
• The number of CNG operated motor vehicles has grown steadily at a CAGR of 12.42% from 31 March 2009 to 30 June 2015
• They have won several awards for contribution towards society and commitment towards health and wealth
• On the upper price band the offer is to raise ~Rs. 1000 Cr which means it will be a mid cap issue

Strengths

• Well positioned in Mumbai which is second largest metropolitan cities in India

They are the sole authorised distributor of CNG and PNG in Mumbai, its adjoining areas and Raigad district. Mumbai is regarded as the commercial and financial capital of India and contributes more than 22% to Maharashtra’s Gross State Domestic product. The growing population in Mumbai and increasing number of vehicles converting to CNG will prove beneficial for them.

• Cost effective availability of domestic natural gas

The natural gas is first allocated to GAIL and then to city gas distribution network. The price of domestic natural gas allocated is significantly lower than the market price of imported natural gas. Also the geographical location enables them to benefit from lower transportation cost as they are close to the source of production of natural gas.

• Infrastructure exclusivity

They have the exclusivity to lay, build, expand and operate a city gas distribution network in Mumbai until 2020, in Adjoining areas till 2030 and in Raigad district till 2040. The period of exclusivity is extendable in blocks of 10 years as per regulations on fulfilment of certain criteria. This mandates a new operator in their area to use only their distribution network upon the payment of transportation tariff to them. They have built an exclusive supply network in Mumbai and its adjoining areas in the past 20 years.  There are significant entry barriers for competitors to enter into their area of operation due to infrastructure exclusivity, need for a large investment to establish distribution network and lead time in the allocation of domestic natural gas and obtaining required regulatory approvals

• Experience in successful development and operation of city gas distribution business

They have built in house project management capabilities, robust operation and maintenance processes. They have implemented safety management systems to ensure uninterrupted distribution of natural gas.

Risk factors

• A majority of natural gas supply requirements are met by allocation of domestic natural gas in accordance with the new domestic natural gas pricing guidelines 2014. Any increase in price of natural gas or any reduction in allocation amount of domestic natural gas may have adverse effect on their business.
• The price of domestic natural gas purchased is in US Dollars while the selling Price is in Rupee terms. Therefore it is subject to currency risk.
• If alternative fuels example petrol, diesel, etc become more cost effective their business results will be impacted.
• Their major business is attributable to their CNG business. Any decrease in CNG sales will impact the business.
• Any breakdown in the network infrastructure through which they supply natural gas could adversely impact the business.
• They are required to maintain number of license, permits and authorisations. Breach could adversely impact the business.

Valuations

Data Source: DRHP

Increasing Net Profit after tax from 2011 to 2015 with slight dip in 2013

Valuation compared to peers

Data Source: DRHP

The issue is available at a PE of ~12.50 at the upper price band and a PE of ~11.30 at the lower price band, based on basic EPS, which is lower compared to its peers. The return on net worth is also above 20% which is higher compared to its peers.

Our opinion

You can subscribe to this issue. Its infrastructure exclusivity and entry barriers are big positives. Its valuations are reasonable compared to peers. Also rising prices of oil, petrol and diesel may increase demand for CNG motor vehicles.

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IPO under the lens – Dr. Lal Pathlabs

Dr. Lal Pathlabs provides diagnostic and related healthcare tests and services in India. It was incorporated on 14 February, 1995. They offer patients and healthcare providers a broad range of diagnostic and related healthcare tests and services for use in core testing, patient diagnosis and the prevention, monitoring and treatment of disease and other health conditions.

Image Source: dir.indiamart.com

Dr. Lal Pathlabs Ltd. is coming with an IPO. The details are as follows:

Data Source: Axis Capital

Quick Facts:

• They have built a national, “hub and spoke” network that includes their National Reference Laboratory in New Delhi, 163 other clinical laboratories, 1,340 patient service centers and over 5,000 pickup points as of March 31, 2015.The “hub and spoke” model, whereby specimens are collected across multiple locations within a region for delivery to a predesignated clinical laboratory for centralized diagnostic testing, provides greater economies of scale. Their network is present across India, including large cities such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad and Kolkata.

• The healthcare tests and services include:

Data Source: Axis Capital

• Their centralized information technology platform fully integrates their large network through a common logistics and payments system and tracks their operations and internal performance metrics, thereby enabling them to improve the efficiencies of their business.

Competitive Strengths:

• Improving Revenue from Operations and PAT as a percentage of revenue.

Data Source: Axis Capital

The EV/EBITDA for FY 15 at 27 is in line with another diagnostic chain, Metropolis and greater than Apollo Hospitals at 25 times EV/ EBITDA a per The Economic Times Report

The Return on Capital Employed at 45.79% is higher compared to Apollo at 13.15% as per The Mint Report

• They have built a national network consisting of their National Reference Laboratory in New Delhi, 171 other clinical laboratories and 1,554 patient service centers as of September 30, 2015. Their nationwide network and reputation for providing quality diagnostic healthcare services positions them well to take advantage of the growth of the Indian diagnostic healthcare services industry. Combined with the current fragmentation of the industry, it can be viewed as an opportunity for additional growth as smaller stand-alone laboratories and centers are choosing to join larger diagnostic healthcare services chains like Lal Pathlabs as franchisees or as attractive acquisition targets.

• Their centralized information technology platform fully integrates their large network through a common logistics and payments system, thereby allowing them to collect more efficiently samples and payments from patients and healthcare service providers. It also tracks their operations and internal performance metrics, thereby enabling improvement of operating efficiency of their business.it also gives healthcare providers convenient, online access to diagnostic results. Furthermore, the growth of their network is supported by the scalability of their technology platform, which readily can adapt to the increased data requirements of additional clinical laboratories and patient service centers.

Risk Factors:

• The diagnostic healthcare services industry in India is highly competitive and has low barriers to entry.
• Business interruptions at their National Reference Laboratory may adversely affect their ability to process clinical tests and highly complex tests. A significant portion of their business comes from Northern and Eastern India, and any loss of business in these areas could have a material and adverse effect on their business.

Data Source: DRHP

• Their business depends on the performance of franchisees and business partners. Any non-performance by these franchisees or business partners may adversely affect their business operations, profitability and cash flows. Some of their laboratory operations are undertaken jointly with third parties, whose interests may differ from theirs and such arrangements, entail certain risks.

Data Source: DRHP

• Technological advancement may lead to more cost-effective technologies or non-invasive diagnostic healthcare tests that can be performed without the use of specialized diagnostic healthcare service centers or laboratories, which could adversely affect their business, financial condition, results of operations and cash flows.

• They depend on third-party manufacturers for testing equipment and reagents such that price increases for testing equipment and/or reagents, and the discontinuation or recall of existing testing equipment and/or reagents as well as the failure or malfunction of any of their equipment could adversely affect their business.

 Our View

Despite “hub and spoke” and a centralized IT platform we believe the valuations of 46-47 P/E are high compared to peers. The earnings have grown at ~16% for FY 2014 to 2015 and at ~46% for FY 2013 to FY 2014. We do not recommend subscription to this IPO.

Data Source: DRHP.

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IPO under the lens – Alkem Laboratories Ltd.

Alkem is a leading Indian pharmaceutical company with global operations, engaged in the development, manufacture and sale of pharmaceutical and nutraceutical products. It was ranked fifth in the Indian pharmaceutical market in terms of domestic sales for fiscal year 2015.

Image Source: http://www.dreamstime.com

It is coming up with an IPO and the details are as follows:

Data Source: Axis Capital

Image Source: http://www.bdnews21.com

Background:

Alkem was established in 1973, and they produce branded generics, generic drugs, active pharmaceutical ingredients (“APIs”) and Nutraceuticals, which they market in India and 55 countries internationally, primarily the US. Alkem has 16 Manufacturing Units; 14 in India & 2 in U.S.  5 of their facilities are USFDA, TGA and UK-MHRA approved.

 Competitive Strength:

• Market leadership in various therapeutic areas and ability to build market leading brands in the domestic market

 Alkem was ranked fifth in the Indian pharmaceutical market in terms of domestic sales for fiscal year 2015.

They are also among the top ten companies in the vitamins, minerals, nutrients in terms of Indian market share for March 2015.

Data source: RHP, Axis capital.

The above figure shows improving EBITDA margins and PAT as percentage to revenue.

• Reasonable valuations:

(1) Based on restated consolidated financials of Alkem for fiscal year 2015.(2)Based on audited consolidated financials for fiscal year 2015. Based on closing market price as on October 30, 2015, available on www.bseindia.com

 Data Source: DRHP

* P/E at upper end of the price band.

• Extensive sales, marketing and distribution networks in India:

As a result of their strong sales, marketing and distribution capabilities, their products were prescribed by an estimated 70.7% of total prescribers and an estimated 71.9% of total prescribers, across various specialties in fiscal year 2015 and in the six months ended September 30, 2015 respectively. Their medical representatives cover all states in India, including rural areas.

• Strong Research and development capabilities:

Alkem’s research and development department carries out process development and analytical research for their domestic and international markets. As of October 31, 2015, they employed 480 scientists working on various drug products and substances in India and the US. In addition, they also have a regulatory affairs team, which is responsible for various filings and approvals related to their products in India and internationally. They also have a dedicated in-house team of intellectual property experts for their products and processes in various geographical markets. As of October 31, 2015, they had filed 69 ANDAs in the US of which 21 have been approved and three have received tentative approvals.

They also have a 60-bed clinical research organization facility where they conduct studies on healthy volunteers to prove the effectiveness of developed formulations. This facility has been audited by the USFDA, UK-MHRA and other regulatory agencies.

They have a strong pipeline of products under development for their focus markets.

• Fastest growing and established international markets:

Alkem has expanded internationally through both organic growth and certain strategic acquisitions. The US is the key focus market for their international operations.

Revenues from their international operations have grown at a CAGR of 45.7% between fiscal year 2011 and 2015. The contribution of the net revenues from the international operations has grown from12.6% of the net revenues from operations in fiscal year 2011 to 25.3% of the net revenues from operations in fiscal year 2015.

• Geographically diversified manufacturing facilities:

They operate 14 manufacturing facilities in India, 3 of which are USFDA approved and also have other key approvals from international regulatory agencies such as TGA Australia and UK-MHRA among others for certain of their facilities. Some of their manufacturing plants enjoy excise and income tax benefits that are available for different periods.

Risk Factors

• Their operations are subject to extensive regulation in each market in which they do business. Regulatory authorities in each of these markets must approve their products before they can market them.

• In many countries in which they currently operate, including India, pharmaceutical prices are subject to regulation. The existence of price controls can limit the revenues they earn from their products.

• They are susceptible to product liability claims that may not be covered by insurance which may require substantial expenditure and may adversely affect their reputation and if successful, could require them to pay substantial sums.

• Their international operations expose them to complex management, legal, tax and economic risks, which could adversely affect their business.

• Stricter marketing norms prescribed by a new code of conduct in India for companies doing business in the pharmaceuticals industry could affect their ability to effectively market their products.

• If their research and development efforts do not succeed, this may hinder the introduction of new products.

Our Opinion  

Since Alkem has healthy EBITDA margin and PAT as a % of revenue, and compared to the P/E of peer companies, Alkem laboratories looks reasonably priced, investors may consider subscribing to this issue. Due to the expectation around a Fed rate hike by the US in the near term, investors need to be cautious and purchase the stock from a long term perspective, and not for listing gains.

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IPO Under the lens -Indigo IPO

InterGlobe Aviation Ltd, which runs India’s largest airline by market share IndiGo, and its existing investors plan to sell around 10% of its equity.

Source : Economic Times

Quick facts

• First big listing after Jet: IndiGo’s IPO will be the first big listing afterJet Airways’ 2005 IPO. Jet Airways (India) Ltd, then India’s largest private airline, raised 1,900 crore in its 2005 IPO. The carrier, which is part- owned by Etihad Airways PJSC, now has a market capitalization of $494 million while SpiceJet Ltd is valued at $172 million

• Existing Shareholders:

 

• Use of Funds: According to its share sale prospectus, IndiGo will use 1,165.66 crore to retire liabilities and acquire aircraft. It will spendRs.33.36 crore for equipment acquisition and rest for general corporate purposes.

What works for Indigo

• Only profitable Indian carrier: IndiGo is India’s largest no-frills airline and has been the only profitable Indian carrier for the past seven years out of its nine years of existence. Indigo has won a reputation for its service quality and on-time performance in an industry characterized by debt and accumulated losses. The airline turned profitable in fiscal 2009 and has remained profitable in each subsequent fiscal through FY14. No other Indian airline has consistently remained profitable over the same period, according to consulting firm CAPA India.
• Order Book: IndoGo maintains largest order book of any Indian carrier. The significant volumes that they generate mean that they have much better bargaining power vis a vis other players, allowing them to keep their costs down.
• ASK (Average seat kilometers): ASK measures an airlines passenger carrying capacity. IndiGo’s carrying capacity has increase from 2004 to 2014 while in the same period for other carriers it has gone down.
• Falling jet fuel prices: Falling jet fuel prices in the last one year Fom Rs.165.6 in September 2014 to Rs. 92.24 in September 2015 will reduce the input cost for airline industry dramatically.

Risk factors

• Continuing to apply the low cost carrier model: The airline industry is characterized by low profit margins and high fixed costs, including lease and other aircraft acquisition charges, engineering and maintenance charges, financing commitments, staff costs and IT costs.

Significant operating expenses, such as airport charges, do not vary according to passenger load factors. In order for them to profitably operate their business, they must continue to achieve, on a regular basis, high utilization of their aircraft, low levels of operating and other costs, careful management of passenger load factors and revenue yields, acceptable service levels and a high degree of safety.  Some of these factors are not under their control. Therefore, profits may vary. Any change in fuel costs could significantly impact profitability.

• Production delays for Airbus A320neo aircraft: Production delays in the order placed for Airbus A320neo in 2011 could impact their expansion plans.
• Foreign Exchange Risk of depreciating Rupee against Dollar: With substantially all their revenues denominated in Rupees, they are exposed to foreign exchange rate risk as a substantial portion of their expenses are denominated in U.S. Dollars, including their aircraft orders with Airbus.

Quantitative Factors:

Comparison with industry peers

Note: The above shares have a face value of Rs.10

IndiGo is the only profitable airline currently, though Spicejet has just started to turn profitable post the change in its management.

Other Ratios (Source: Mint)

 

Recommendation

The company’s track record and focus on the basics provide comfort to investors, whilst its dividend payout strategy prior to the IPO has raised quite a few eyebrows and negative questions around governance. With India being one of the fastest growing markets for air travel, a well managed fleet expansion plan could pay off well for long term investors, especially as low cost airlines have tended to be the only category of the airline business that have made monies for investors.

Investors could look at investing in the Indigo IPO.

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IPO under the lens – Coffee Day Enterprises IPO

Coffee Day Enterprises is coming with an IPO on 14^th October 2015.

Coffee Day Enterprises Limited (CDEL) is the parent company of Café Coffee Day’s. Apart from CCD its holdings include Coffee Day Hotels and Resorts Pvt Ltd, Global Technology Ventures Ltd and Tanglin Developments Ltd.

Details for the IPO are as follows

Coffee day Enterprises Limited IPO
Offer Period	Offer Opens On :  Wednesday, October 14, 2015 Offer Closes On :  Friday, October 16, 2015
Price Band	Rs.316/- to Rs.328/-
Bid Lot	45 Equity shares and multiple of 45 Equity Shares
Global Book Running Lead Manager	Kotak Mahindra Capital Company Limited/ Citi / Morgan Stanley
Book Running Lead Managers	Axis Capital/ Edelweiss/ Yes Bank
Registrar	Link Intime India Private Limited
Syndicate Member	Kotak Securities Limited is one of the Syndicate member
Offer Structure
Issue Size:	Rs.1150 cr.
Employee Reservation:	Rs.15 cr.
Net issue to Public:	Rs.1135 cr.
QIB’s	50% of Net Issue Rs.568 cr.(including Anchor)
NIB’s	15% of Net Issue Rs.170 cr.
Retail (upto Rs.200,000)	35% of Net Issue Rs.397 cr.
Listing	BSE & NSE

The Breakup..

Out of the INR 1,150 crore

• Nearly INR632.8 crore will be used for repayment of loans
• 7 crore will be used for expansion of its retail network. Included in its expansion plans are 216 new outlets and 105 Coffee Day Xpress kiosks by FY 2016/17.
• Another INR97.3 crore will be invested in manufacturing and assembling of vending machines.
• CDEL has also earmarked INR60.6 crore for refurbishment of existing outlets and vending machines
• Setting-up of a new coffee roasting plant near its existing facility in Chikkamagaluru will involve INR41.9 crore.
• And the rest for general operational purposes.

Existing investors

The IPO will only involve issue of fresh shares and will not have any offer for sale (OFS) from existing investors. The list of existing investors include VG Siddhartha-led promoter group with 92.74% stake in the company, private equity firm KKR and Infosys co-founder Nandan Nilekani hold 3.43% and 1.77% equity stake respectively. Bennett Coleman & Company Limited and Rakesh Jhunjhunwala’s Rare Enterprises hold (13,68,304 shares or 1.17%) and (275,856 shares or 0.24%) respectively.

Pros and Cons

Pros

• Market share of 46% in organized café outlet market:

The Company owns 46% share in the organized café outlets market.

At the end of 2014, there were 1,472 Café Coffee Day outlets in more than 200 cities while Barista – its nearest competitor – has all of 169 outlets and Starbucks – global leader in the trade –has just 64 outlets.

• Brand Power: CCD is the most renowned brand in Tier I cities with expansion plans in Tire II Cities.
• Diversified Business: Holding Company CDEL has diversified business with coffee business accounting for more than 50% of the total revenue, 36.9% from logistics, 7.5% from Financial Services and 3.3% from Technology parks. 

Cons

• Not a profit making Business: In spite of huge market share the company is not able to make profit. Huge Finance cost is eating out on the profits. While revenues doubled over the past four years, it made an operating profit only in one of those past four years—back in FY10-11.
• Business Model: Its continuous expansion is leading to operating losses and the nature of business is also volatile.

Risk Factors

• The coffee business segment is highly competitive: The coffee business, including quick service food and beverages retail business through their Café Network outlets, Coffee Day Xpress kiosks, F&G outlets and the vending business, currently faces and may continue to face intense and increasing competition from both local and international competitors in terms of price, product offerings, product experience, quality, advertising initiatives, customer service, reputation, ambience, locations, attractiveness and maintenance of outlets for coffee, food and beverages.
• Subject to risks associated with leasing space: Payments under the leases accounted for a significant portion of their operating expenses in CDGL. A significant number of their lease agreements for their Café Network outlets may not be duly registered or adequately stamped. In the event of dispute they may not be able to enforce leasehold rights. Therefore, they may not be able to operate our Café Network outlets and Coffee Day Xpress kiosks successfully.
• Large number of approvals: They require a number of approvals, licenses, registrations and permits for our Café Network outlets, F&G outlets, vending machine business, Coffee Day Xpress kiosks, distribution centres, coffee roasting plant and coffee curing plant and the failure to obtain or renew them in a timely manner may adversely affect their operations. 

Valuations         

As per consolidated financial statements

Fiscal year ended/ Period Ended	EPS	Return on Net Worth
31-Mar-12	1.65	3.12%
31-Mar-13	-1.83	3.29%
31-Mar-14	-6.6	-13.85%

As we can see the Earning per share is negative for the years 2013 and 2014

Also the return on net worth is negative for the year 2014.

Our Opinion

The company is in existence since 1996 and is still struggling to make profits. We do not recommend investing in this IPO.

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